L5 Flashcards
What is the total return?- geometric return
total return is equivalent to rebalancing the portfolio, reinvesting gains and realising losses with the effects of compounding
What is the arithmetic return - additive return?
equivalent to the portfolio to a constant notional exposure, drawing down gains and recapitalising for lossess
What is the average annual returns?
ARR represents the implied yield over a specific period - calculated as geometric mean returns
What is the annualised volatility
volatility is the range of prices for s security or portolfio of securities
standard deviation over the stated period
What is the sharpe ratio?
measures the risk-adjusted average excess return over the risk free rate and is a useful return indicator for performance comparison
- how does the asset perform absolutely relative to its risk profile
- different returns on a high yield bond but adjusted to risk dynamics can be v different
the ratio is calculated by dividing the average excess returns over the risk-free rate by the standard dev of the average excess returns
What is beta?
the coefficient that measures the volatility of a stock of portfolio relative to the overall market
a beta below 1 means that the security is relatively less volatile
beta greater than 1 means the security is relatively more volatile
What is correlation?
the strength of a relationship between two variables such as a stock of portfolio
statistical figure that measures how two securities move to each other r
range for correlation coefficients is -1.0 to 1.0
the higher the value is, the stronger the relationship between the two variables
negative correlation the two variables move in opposite directions
zero means relationship
1 means move in the same direction
What is the ROA equation?
ROA = net income/ total assets
What is ROA?
Profitability is assessed relative to costs and expenses - in comparison to asset to see how effectively a company is deploying assets to generate sales and profit
economies of scale can help lower costs and improve margins, returns may grow at a faster rate than assets increasing ROA
What is return on equity?
measures a companys ability to earn a return on its equity investments
may increase without additional equity investments
rise due to a higher net income being generated from a larger asset based funded with debt
What is the ROE equation?
ROE= net income/shareholder equity
What is a profit margin used for?
to measure a company profitability at various cost levels of inquiry
including gross margins, operating margin, net profit margin
margins will reduce as layers of additional costs are taken into consideration - such as COGs, operating expenses, and taxes
What is a gross margin?
measures how much a company makes after accounting for COGs - cost of goods sold
How do you work out the gross profit margin ratio?
(Gross profit/net sales) x 100
What is the operating margin?
the percentage of sales left after covering COGs and operating expenses
How do you work out the operating profit margin ratio?
(operating profit/net sales) x 100
What is the net profit margin?
a company’s ability to generate earning after all expenses and taxes
How do you work out the net profit margin?
(net income/net sales) x 100
What is the relationship between interest rate cycles and economic cycles?
Interest rate cycle are generally related to the economic cycle
movements in interest rates should mirror the economic cycle
If the economy is growing strongly and inflation pressures are increasing - what would you expect to happen?
Central banks will increase interest rates to slow down the economy and prevent inflation
What is a credit regime?
represents a period of rising credit risk and financial market deterioration
analysis highlights these periods over the past 10 years
determined by a 350bps increase in the average option-adjusted spread to capture rising credit risk - there are also periods captured before this to capture pre and post market deterioration befreo the option-adjusted spread spile
What were three credit regimes in the past 10 years?
- European soverign debt crisis
- global economic shocks in 2016
- covid pandemic
What is a credit crisis?
caused by deterioration in market liquidity and the credit quality of market participants, resulting in a slowdown in lending activity due to rising levels of credit risk
can cause a breakdown of the financial system and result in a credit crisis
What is an option-adjusted spread
a measure of credit risk and takes into account embedded options
the credit risk is reflected by the yield-spread differential on a fixed-income security to that of the risk-free rate
i.e. the spread between a investment grad bond or high yield vs a lower quality bond
What is a call option vs a put option?
Call is to buy
Put is to sell
What is a commodity regime?
depcits changes in historical market prices for oil, natural gas and coal
select most widely traded commodities for the analysis at the global portfolio level
Starting with increased consumer demand and increased money supply can you talk to an inflationary cycle
- increased consumer borrowing
- increased consumer spending
- increased corporate profits
4/ increased employment and wages - increased consumer income
this opposite for deflationary cycles instead of increase put decrease
How does the global renewable vs ff portfolio beta compare?
renewable is beta of 1.08
ff is a beta of 1.31
ff is more reactive to the market moves
How have ff vs renewables portfolio performed and why?
Renewables have outperformed FF in all regions
performed better in advancing then emerging markets
More AUM going towards renewables
why
- tech costs are going down - cost based decreasing thus improving margins and profitability
- policy tailwinds supporting investment into this asset class
How does FF vs RE compare on leverage?
RE>FF leverage
due to contracted nature of the revenue systems
upfront costs and have to finance themselves
advanced RE> FF companies in leverage similar to the global portfolio
FF vs RE profitability - ROA?
FF companies have dropped in half while RE have improved 3x
Dividend yeilds are lower in RE than FF - but a lack of divide is not always due to a lack of profits
RE did have a negative ROA - costs were significantly higher due but government subsidies
profitability improved for renewables while declining for FF
What is the leverage like in emerging markets?
lowest in all regsions
- reflects lower level of development of debt margins
renewable companies in china have the highest leverage ration among regions
What is the profitability of companies in emerging markets?
FF> RE profits
but dramatic reduction in profitability in FF
How did RE respond to the three credit regimes?
RE reacted in 2011 negatively
but in 2016 and Covid responded more favourably then other markets
oil prices going down and sentiment (govt) toward renewables = many different driving factors
issues with refinancing in oil market
What is the relationship between RE and commodities?
RE are not v correlated to commodities - not subject to commodity price fluctuations
whereas fuel benefits when oil prices are high and suffer in low commodity markets
the global renewables market is less correlated to the broader market than global ff portfolio
correlation fell during the recent downturn indicating the potential DIVERSIFICATION BENEFITS
Are RE more resilient to deteriorating market fundamentals?
behaved like a safe asset like a bond
Renewables perform differently
multiple different driving forces - investor flows and government intervention
good asset to diversify risks due to the low correlation with broader markets
What was the performance of RE assets in private markets?
Unlisted RE outperformed and exhibited lower annualised volatility than the broader unlisted infrastructure assets as well as the listed market benchmark MSCI ACWi
What asset exhibited the highest volatility ?
global listed ff
What asset had the highest returns?
global listed renewables
but had higher volatility compared to unlisted indices
–> global unlisted renewables are heavily dominated by European wind
What is the average asset size of global unlisted renewables index compared to global unlisted infrastructure?
GUR - over 3x samller average asset size than GUI
How does GUR compare to GUI in ROA and cap intensity?
GUR higher ROA despite having a higer capital intensity
What is the average Debt/asset ration of both GUR and GLR?
75%
highly leveraged
Over the last 5 years how have the cash yeilds been for renewables?
higher cash yeilds compared to infrastructure
What is the correlation between GUR and the MSCI ACWI?
close to 0
UR are good diversifers due to their contracted nature = provides a buffer against shocks
not 100% driven by the same kind of market or conditions - not really correlated to any other commodity
What is the correlation between GUI assets to the MSCI ACWI?
it is negative
What is the relationship between RE and Infra to inflation and bond yeilds?
Negative correlated
when bond yeilds are high then performance deteriorates - higher cost of borrowing reduces the ability to finance
but they benefit from low financing costs therefore are good in a 0-1% interest rate environment
In portfolio theory what is the golden number?
30
How would you summarise the performance and volatility of renewables?
LR - outperformed FF over last decade and exhibited low volatility in most regions
UL - outperformed Unlist Infra assets and listed market benchmarket over 10 years at a diversified index level
How would you summarise the macro conditions?
LR were not as negative affected by adverse credit conditions and commodity price volatility as FF
UR provided diversification benefits during credit events and against cyclical changes in macroeconomic conditions such as commodity prices and inflation rates
but
interest rates do have an impact on renewable returns
How would you summarise market shocks?
LR and UR - showed a good resilience during the pandemic
How would you summarise diversification?
Correlation analysis shows that there are benefits if listed and unlisted rewnables are added to the market portfolio
How are the LT prospects for RE?
good given their role in the energy transition, government support and investor demand
